Adaptation can greatly reduce the potentially devastating economic losses of climate change, but it requires additional public spending and a conducive environment for private adaptation investment.
Ministries of Finance can play an important role because, at its core, climate change adaptation is a problem of economic development and MoFs already have a rich toolbox that can be used to derive policy priorities and estimate investment needs for adaptation.
- Investment needs in climate change adaptation can be defined as the difference between optimal investment levels with and without climate change (strict additionality definition). This intentionally excludes investments in development that would be optimal even without climate change and the cost of closing the gap to achieve an optimal level of adaptation to current climate conditions.
- Welfare economics and cost-benefit analysis (CBA) provide a concrete, useful starting point to calculate investment needs based on the criterion of economic efficiency. While there are limitations and challenges to implementing CBA, it can play an important role in helping decision-makers collect, aggregate, and compare information on adaptation projects.
- A lower bound on public adaptation spending can be investment in only public goods such as infrastructure, coastal areas, water management projects, weather forecasts, and early warning systems. An upper bound can include compensation to individuals and firms to offset the cost of adaptation or the cost of residual damages.
- MoFs have the flexibility to determine the best allocation of funds within this broad spectrum but must remain vigilant about potential inefficiencies and inconsistencies in other areas of public spending. Spending needs for adaptation can be estimated using empirical methods. These include process-based or economic simulation models to estimate adaptation investment needs, cross-sectional econometric methods to estimate the likelihood of certain adaptations being chosen (though this does not immediately reveal spending needs), and panel econometric methods to estimate the cost of climate change, including short-term adaptations (though this intentionally omits many long-term, more effective adaptations).
Case studies have been created, (1) estimating the cost of sea-level rise and adaptation, and (2) estimating macrofiscal impacts of weather shocks using billions of weather observations.
Keywords
adaptationempirical methodsinvestment needsmodelsphysical risk
